Barry Ritholtz used to come around here a lot talking smack about how he had so much data proving I was wrong about diversity being a major factor in the mortgage meltdown. So, we laid our cards on the table … and now he doesn’t seem to want to talk about it anymore.

Barry Ritholtz, television commentator and Big Picture blogger, replies in the Comments, continuing our discussion on whether or not “Diversity was a major factor in the mortgage meltdown:”

We live in very different worlds.

Mine is data and numbers and statistics and facts. In the investment world, by how well your theories of what is really going translates into an investable theme; you are judged by performance, not rhetoric.

Your world is all soft theory and suppositions and squishy reasoning and hard-to-prove causation. In my world, it would be described as “not actionable in the investment realm.”

By the way, Barry, did your “investment world” do a really bang-up job of assessing the value of all those mortgages issued in, say, Riverside-San Bernardino in 2005? (Numbers that were readily downloadable from the federal Home Mortgage Disclosure Act database by October 2006, well before the crash?) Maybe, just maybe, your peers were missing a piece of the puzzle intellectually that would have enabled them to make sense of the numbers?

Barry, it’s not your fault that you wrote a whole book about the Crash without thinking about the Diversity angle. Nobody thinks about the downsides of Diveristy. It’s just not done in polite society You don’t have to get your ego all tied up like this in trying to bluster your way out of admitting you made a mistake. Everybody made the same mistake as you.

The interesting legal question is whether it’s against the law to use my insights in offering investment advice. It would almost certainly be disastrous for a mortgage lender to be caught in discovery of a discrimination lawsuit exchanging emails about the higher rates of defaults among Non-Asian Minorities. But is it illegal for an investment adviser to use ethnic demographics in, say, advising clients which states’ bonds to avoid?

Certainly, the most sensible thing for an investment adviser like Barry to do would be to incorporate my ideas in his decision-making while loudly claiming in public to not believe them.

I think we are approaching this from two entirely different universes.

I am looking for cause and effect; I want to see data that supports or detracts from the proposition at hand. PROVE TO ME that X caused Y (including actual statistics).

Your proposal of Diversity causing the housing crash reads to me as a soft philosophical argument that is by definition unprovable — and undisprovable.

At the very least, I see no proof in your writings. They are cogent arguments that leap from A to B to C — but they lack the rigorous statistical evidence to demonstrate something convincingly to people who insist on hard data.

In my belief system, I use as few assumptions as possible. I try to avoid things that are unquantifiable. Statistical back testing is just on way to do that.

But even softer analyses such as war-gaming and alternative scenarios have to have some reasonable basis for proceeding. It cant be all assumptions, beliefs guesses and hunches.

This shows heartening progress in just a few days. Before he was exposed to my work, Mr. Ritholtz was denouncing and demonizing anybody who shared my views.

I’ve run out of patience with tired memes and discredited claims by fools and partisan.

The rhetoric of those pushing nonsense on the public in an attempt to confuse rather than illuminate — the phrase is “agnotology” – only serves to aid the lobbyists working on behalf of the Banks and Investment houses to maintain the status quo. ..

The nonsense rhetoric blogged about has no cost to those pushing these discredited memes …

Now, having finally read my articles, he admits I offer “cogent arguments.” He no longer seems to think he can prove them wrong, so he’s insisting that I haven’t proved them right.

He today argues, not incorrectly, “but they lack the rigorous statistical evidence to demonstrate something convincingly to people who insist on hard data.”

Of course, that tends to be true of all historical writing. As the venerable historian Jacques Barzun wrote at age 93 in his summa, From Dawn to Decadence, in one of his 12 modest dictums summing up what he’s learned during his career as a historian:

The historian does not isolate causes, which defy sorting out even in the natural world; he describes conditions that he judges relevant, adding occasionally an estimate of their relative strength.

Further, let me point out, that I’m not done yet collecting data. For example, we now know the subprime default rates by race for the state of Massachusetts. We now know, on a national level, the default rates by race for FHA loans in the 1990 s. Eventually, somebody will apply the same laborious process to the Big One — California — and then we will be a lot farther along.

In summary, as Mr. Ritholtz more or less admits, my arguments, long ignored, distorted, or demonized, deserve a place at the table in any discussion attempting to discern the historical causes of the present unpleasantness.

This is what I mean by data, from reputable sources, relating to the actual issue at hand.

My apologies for any prior confusion…

Dear Mr. Ritholtz:

We are discussing whether or not “Diversity was a major factor in the mortgage meltdown.” I realize you wish to confine the debate to the narrowest possible technical question of institutions officially covered by the Community Reinvestment Act. As you will recall, however, my invitation to you to debate me here rejected such a contrived and unenlighteningly narrow limitation of the topic. I wrote on Monday morning:

I would certainly debate him on the topic “Diversity was a major factor in the mortgage meltdown.”

The causes are much bigger than the Community Redevelopment Act. I’ve always argued that George W. Bush’s drive to add 5.5 million minority homeowners, as enunciated at the October 15, 2002 White House Conference on Increasing Minority Homeownership, by abolishing down payment requirements and by allowing “low doc” mortages (a.k.a., liar loans) was more directly responsible. But they are obviously both part of the same overall Diversity mindset.

Moreover, you should realize by now from reading those nine articles (you have read them by this point, haven’t you?), you are drawing a legalistic distinction that didn’t have a real world difference. Nonbank mortgage lenders not officially covered by the CRA, such as Angelo Mozilo’s Countrywide, were told in no uncertain terms by the Clinton Administration that either they could start behaving like they were covered by the CRA or the CRA would be legislatively extended to them.

“Pressuring nonbank lenders to make more loans to poor minorities didn’t stop … If it didn’t happen, Clinton officials warned, they’d seek to extend [Community Reinvestment Act] regulations to all mortgage makers. … To rebuff the criticism, the Mortgage Bankers Association (MBA) shocked the financial world by signing a 1994 agreement with the Department of Housing and Urban Development (HUD), pledging to increase lending to minorities and join in new efforts to rewrite lending standards. The first MBA member to sign up: Countrywide Financial, the mortgage firm that would be at the core of the subprime meltdown.”

Both in order to maintain the favor of regulators, politicians, Fannie and Freddie, and the media, and because Mozilo appears to have been a true believer in the Diversity dogma and saw himself as sticking it to the old WASP finacial establishment by lending money to “underserved Americans” (as Connie Bruck’s recent New Yorker article makes clear), Countrywide made pledges identical in form to the pledges made by CRA-covered institutions, such as Mozilo’s $1 trillion (that’s trillion with a T) promise on January 14, 2005. (See Countrywide’s press release entitled Countrywide Expands Commitment to $1 Trillion in Home Loans to Minority and Lower-Income Borrowers.)

Once you’ve finished reading my nine articles, Mr. Ritholtz, so that you are up to speed enough to carry on a sophisticated discussion of “Diversity was a major factor in the mortgage meltdown,” please come back. I look forward to carrying on a well-informed discussion.

Mr. Ritholtz apparently hasn’t been paying attention here, but I also fear I’ve overloaded my regular readers so much on the topic of diversity and mortgages over the last couple of years that many would rather hear that I’m about to start a new 9-part series on track & field statistics (my all-time least popular obsession) than hear the same old same old about diversity and the mortgage meltdown.

So, I’ll just link to a few highlights in chronological order. The data piles up as we get closer to the present, but it’s helpful to understand how my thinking evolved from the point when I had no idea what I was talking about regarding mortgages.

Let’s begin with my first blog post on the subject on August 12, 2007, a couple of weeks into the subprime collapse, where you can see my hesitancy to get involved in a topic where I didn’t know anything, but I did remember a few things that almost everybody else seemed to have forgotten:

I’m sure the private financial markets were quite capable of blowing up a big bubble by themselves in the eternal see-saw struggle between greed and fear, but this political pressure for lending to minorities with doubtful credit must have exacerbated the problem. About half of all mortgages for blacks and Hispanics are subprime, versus about one-sixth for whites.

A reader has sent me some links to articles from 5 to 9 years ago to show me I’m not hallucinating about what I remember. The first are from early in this decade about Fannie Mae’s big plans for boosting mortgages for minorities. Now, I don’t pretend to understand what Fannie Mae is (but does anybody?). It’s some kind of quasi-governmental publicly-traded for-profit thinga-ma-bob, but Fannie Mae’s past pronouncements do make interesting reading at present.

Straightforward tax-and-spend programs were out of favor in the 1990s, but lean-on-lenders for the benefit of your political constituents is always in season…

Next, there’s my June 22, 2008 Taki’s Magazine article, The Diversity Recession, where I finally began to pull my thoughts together into a semblance of a thesis about just how manifold was the involvement of diversity on the mortgage meltdown:

Uncovering the roots of the disastrous home mortgage bubble that popped last year will keep economic historians busy for decades. Yet, one factor has so far been largely overlooked: the bipartisan social engineering crusade to drive up the rate of homeownership by handing out more mortgages to minorities.

More than a negligible amount of the blame for the mortgage meltdown can be traced back to multiculturalism: government-mandated affirmative-action lending, demographic change, illegal immigration, and the mind-numbing effects of political correctness.

The chickens have finally come home to roost…

In VDARE.com on September 28, 2008, I explained how one central element in the housing bubble, President Bush’s message to federal regulators to loosen up on zero down mortgages and liar loans in the name of increasing minority homeownership by 5.5 million households at his October 15, 2002 White House Conference on Minority Homeownership, was tied to the Karl Rove’s grand strategy of wooing Hispanic voters to the GOP:

There’s one man, however, who has so far escaped any blame. Few have realized something that turns out to have been staring us in the face all along: that the mortgage mess was, in sizable measure, an outgrowth of the primary political goal of the Bush Administration.

As you’ll recall, Rove’s best-known tactic to appeal to Latino voters was repeatedly pushing “comprehensive immigration reform” (i.e., an amnesty for illegal immigrants).Rove, though, had other arrows in his quiver. One was a plan to turn Hispanics into Republicans by providing them with loose credit so they could become homeowners…

Then, “Tino” introduced me to the key source for numbers, the Federal Home Mortgage Disclosure Act database. The federal government carefully tracks how much minorities are getting in mortgage dollars (but not, of course, whether they are paying them back). I blogged on October 10, 2008:

Tino has added up all the subprime mortgage dollars for the entire disastrous 2004-2007 period. Among borrowers whose ethnicity is unambiguous, he comes up with $900 billion subprime dollars going to non-Hispanic whites, $887 billion to minorities. So, that’s 50% of subprime dollars
during the worst years of the Bubble went to minorities.

Someday, we’ll get a count of defaulted dollars by race.

On January 21, 2009, I posted a graph I had made up from data of a Boston Fed study of every subprime default in Massachusetts showing that Non-Asian Minority subprime default rates average about twice the white rate over the years.

So, in Massachusetts, the Non-Asian Minority foreclosure rate on subprime mortgages was about twice the white rate. That didn’t change too much over the years, but the proportion of mortgages that were subprime and the proportion of mortgage dollars going to minorities changed radically in the Bush years, contributing sizably to the disastrous mortgage meltdown that began in 2007 and triggered the more general crash of 2008.

If that two to one minority to white foreclosure ratio seen in Massachusetts holds true nationally, where minorities took out half the subprime dollars, then minorities would account for two-thirds of all defaulted subprime dollars.

However, Asians probably have a lower default rate. On the other hand, they largely stayed away from subprime mortgages, so it’s not a big issue. So, it’s likely that minorities accounted for at least 60% of the subprime dollars defaulted.

In VDARE.com on February 1, 2009, I finally got around to focusing on the Community Reinvestment Act, using Washington Mutual, which had pledged $375 billion in CRA lending as a case study of how the CRA subtly changed the culture of the lending business.

Two weeks later, I graphed data from the National Community Reinvestment Coalition showing over $4 trillion in CRA pledges by covered institions between 1996 and 2005, with $1.6 trillion pledged in 2004 alone.

On May 17, 2009 in VDARE.com, I focused on HMDA data on lending in California, where a great majority of defaulted dollars are found. I found that according to federal data, minorities got 77% of subprime dollars loaned out for home purchases in California in 2006, the worst year for subsequent defaults. Within California’s 20 biggest metropolitan areas, there was a 0.89 correlation between minority share of subprime dollars in 2006 and default rates in Q1-2009.

And in VDARE.com on June 22, 2009, I profiled the largest lender not officially covered by the CRA — Angelo Mozilo of Countrywide. And showed that Countrywide had been told by the Clinton Administration that they would be brought under the CRA if they didn’t act like they were under the CRA. But, Mozilo quickly became a true believer, which accounts for Countrywide’s $1 trillion dollar CRA-style pledge in early 2005.

I’ve run out of patience with tired memes and discredited claims by fools and partisan.

The rhetoric of those pushing nonsense on the public in an attempt to confuse rather than illuminate — the phrase is “agnotology” – only serves to aid the lobbyists working on behalf of the Banks and Investment houses to maintain the status quo.

All is well, nothing to see here, move along.

Well, its time to put up or shut up: I hereby challenge any of those who believe the CRA [Community Reinvestment Act] is at prime fault in the housing boom and collapse, and economic morass we are in to a debate. The question for debate: “Is the CRA significantly to blame for the credit crisis?”

A mutually agreed upon time and place, outcome determined by a fair jury, for any dollar amount between $10,000 up to $100,000 dollars (i.e., for more than just bragging rights).

The nonsense rhetoric blogged about has no cost to those pushing these discredited memes — but interferes in the societal attempts to understand how these problems arose and then how to fix them. Perhaps this will help clarify the issue by forcing those with partisan agendas to stand behind their claims.

Which of the many “CRA was a major factor” proponents have the courage of their conviction to step forward?

I would certainly debate him on the topic “Diversity was a major factor in the mortgage meltdown.”

The causes are much bigger than the Community Redevelopment Act. I’ve always argued that George W. Bush’s drive to add 5.5 million minority homeowners, as enunciated at the October 15, 2002 White House Conference on Increasing Minority Homeownership, by abolishing down payment requirements and by allowing “low doc” mortages (a.k.a., liar loans) was more directly responsible. But they are obviously both part of the same overall Diversity mindset.

Popular liberal economics commentator Barry Ritholtz has posted what struck me originally as a curious response to Connie Bruck’s New Yorker article on Angelo Mozilo, which touched in surprising measure on the sizable role that minority lending played in Countrywide’s debacle. Ritholtz writes:

Yet another example of how the sub-prime market was a creature of the profit motive, and not government mandates.

There is this fascinating little anecdote in Connie Bruck’s Angelo’s Ashes — about Angelo Mozilo’s experiences in Florida as a dark skinned NY Italian, and how that impacted his later venture into minority lending (early 90s) amnd subprime lending (middle 90s):

“The new company [Countrywide] sent Mozilo first to Virginia Beach and then to Orlando. He had never lived outside the Bronx, and years later he told friends that it had been difficult to be a darkskinned Italian-American in these communities. In Virginia Beach, the local club where businesspeople congregated refused to admit him, and in Orlando he had trouble selling mortgages until he met a group of Jewish homebuilders who couldn’t get financing. As his sister, Lori, told me, “Angelo said, ‘Nobody wants to work with you. Nobody wants to work with me. Let’s do it together.’

He was always this Italian guy people didn’t want to accept.” She went on, “When he tans he gets really dark. My mother told me that when he worked in Florida he was asked to sit in the back of the bus.”

And just what might have this done to Angelo’s world view later on? Alex, I’ll take pop psychology for $100:

Despite Mozilo’s ideals, Countrywide did not have a strong record of lending to minorities. In 1992, shortly after Mozilo became chairman of the Mortgage Bankers Association, the Federal Reserve Bank of Boston issued a report stating that it had found systemic discrimination by mortgage lenders against African-American and Hispanic borrowers. Robert Gnaizda, former general counsel of the Greenlining Institute, a nonprofit organization focussed on minority rights, sent the report to Mozilo and other mortgage bankers. “I received a harsh response from Mozilo,” Gnaizda told me.

Privately, however, Mozilo was appalled. He ordered that all Countrywide’s records on rejected minority applicants be sent to him, and he retroactively approved about half of them. Then he dispatched African-Americans, posing as prospective borrowers—he called them “mystery shoppers”—to Countrywide branches, and concluded that they were indeed treated differently from white borrowers.

Countrywide opened new offices in inner-city areas, created counselling centers, and loosened some lending standards, to include borrowers with less than pristine credit histories. Between 1993 and 1994, the company’s loans to African-American borrowers rose three hundred and twenty-five per cent, and to Hispanics they increased a hundred and sixty-three per cent. In 1994, Countrywide became the first mortgage lender to sign a fair-lending agreement with the Department of Housing and Urban Development.

“Countrywide went from close to the bottom in lending to minorities to near the top,” Gnaizda said. “I remember Mozilo telling me, ‘I don’t want to narrow the gap in lending to minorities, I want to end it.’ ”

Eventually, subprime loans became too attractive a business for Countrywide to resist. In September, 1996, it created a new subsidiary for these loans, called Full Spectrum Lending; if the loans performed poorly, the Countrywide brand would not be tarnished. “It was a careful entry, considered closely by those at the top of the company,” a former high-level Countrywide executive recalled. “We sat together and asked each other, ‘Would you make this loan with your money?’ ”

To offset the credit risk posed by subprime lending, the company required borrowers to make a substantial equity investment, ranging from fifteen to thirty-five per cent. . .”

It was the Private sector that saw a profit opportunity and went for it. They made the loans. The government’s role was to provide rhetoric . . .

This is representative of the quality of public debate over what caused the mortgage meltdown. In public, there are only two sides: the liberal (Corporate Greed!) and the libertarian (Government Interference!).

In contrast, the real divide is between the overwhelmingly dominant Diversity Dogmatists, liberal and libertarian, versus the tiny number of Diversity Heretics. Personally, I don’t oppose government regulation of the mortgage business to prevent over-optimistic borrowers and lenders from causing defaults down the road, so I’m not a libertarian on this. But, in this case, the federal government was (and still is) regulating in the wrong direction: toward more risk.

Would minorities have ended up getting vast amounts of overly optimistic loans anyway even if the government had been neutral on the question? Perhaps — the Diversity Dogma is so entrenched in our society that supposedly hard-headed businessmen like Mozilo believe it just as much as the politicians — at least judging from their public statements. And, in the long run, few people have the strength of character to be hypocritical enough to act prudently when acting on the “ideals” you constantly extol (but don’t actually believe) can you make a lot of money in the short run.

Finally, even if government and business had been sensible, the brute fact of population change in California, replacing middle class people with peasant class people, would have caused massive problems in generating enough productivity to repay debts.

But this way of thinking is so foreign, so unthinkable that almost nobody understands the catastrophe that just happened to us.

Contact Steve Sailer

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